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Convenience – Anything, Anytime, Anywhere How Convenience Impacts the Food Industry – and How Food Manufacturers Need to Change in Order to Win

Convenience – Anything, Anytime, Anywhere How impacts the – And how food manufacturers need to change in order to win

Convenience – Anything, Anytime, Anywhere

The German convenience : behind the curve but catching up 04 The ’s perspective 06 Convenience is here to stay 06 The race to hyper-convenience 07 A ’s perspective: HoReCas increasingly rely on convenience products 12 How food manufacturers need to change in order to win 14 Contacts 18

03 The German market: behind the curve but catching up

Anything, anytime, anywhere – conveni- With the limited number of formats Fig. 1 – Growth ready ence is on the rise. In a fast-paced world and products available in Germany, this where no one ever stops, convenience market still needs to mature +13% strive for convenience solutions in all and offers great growth potential for food aspects of their lives. Driven by these manufacturers and retailers. 5,346 drastic, fast-paced changes in consumer demand, every player along the food Current movements against 4,750 industry chain will have to change if and for sustainability have not stopped they want to remain relevant. the German convenience food market from gaining momentum. China1 and the US have already introduced countless convenience formats and prod- Sales in Germany of ready meals and ucts to meet consumers’ growing demand. other convenience products are expected Due to space constraints, many new to grow by 13 percent from 2010 to 2023 apartment buildings in China no longer to a total value of 5.3bn euros2. offer full facilities. People rarely 2010 2023 at home as a result and rely heavily One excellent example of this trend is the in m (manufacturer sales) on convenience food or out. REWE Group, which recently acquired the convenience specialist Lekkerland. The The future is already here: wholesaler is focusing on last mile delivery Alibaba has launched a new hyper- of convenience food products3 and non- convenience called Hema. food articles to gas stations and kiosks. This omnichannel format offers a perfect With this move, REWE is already gearing mix of online and offline features through up to win the battle for convenience-ori- the app that create an ultra-convenient ented customers, as Lekkerland brings customer experience. They range from in the expertise required to service the mobile product recommendations, fragmented convenience market. 62 percent of millennials in the in-store product scanning and seamless US have purchased prepared deli checkout to click & collect and home deliv- food, carry-out, delivery or fast ery in under 30 minutes. They even have food within the last seven days a kitchen in-store that will cook the fresh compared to only 47 percent of produce to your liking and a dining area in other age groups. which to eat.

1 Department of Agriculture. 2 Statista, 2019. 04 3 Convenience food includes all types of packaged pre-prepared that save time for consumers. For a detailed definition please refer to chapter 2.2. Convenience – Anything, Anytime, Anywhere

Fig. 2 – Supply Chain of Convenience Products

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Food manufacturers need to adapt Convenience means change for Employers are pushing chefs to work more Consumer demand for innovative and everyone from consumers to the efficiently and save time and resources in more convenient products is increasing, HoReCa sector the kitchen. At the same time, consum- and food managers are faced with the Convenience means maximizing efficiency ers want to spend less time and effort challenge of offering new services and and leveraging timesaving potential for purchasing products and have the most shopping formats in order to stay relevant. the customer before, during and after convenient shopping experience possible. purchasing their products and services. Food manufacturers will need to recali- Some food manufacturers serve both brate key competences such as logistics, Assuming that convenience only impacts end consumers and HoReCa players, so sales, product development and pack- end consumers and retailers would be they cannot ignore either of the two per- aging to benefit from the convenience fatal, because it disregards a significant spectives. They need to develop a holistic movement. share of the market. In addition to end approach to convenience. consumers, we are increasingly seeing hotel, and catering players (HoReCa) strive for convenience solutions.

05 The consumer’s perspective

Convenience is here to stay Busy lifestyles and higher incomes also demanding more optimal serving sizes As we have seen in the US and China, the Flexible working hours, part-time employ- to reduce food waste. An increase in single convenience trend is not a short-term ment and labor trends like multiple “mini- and two-person will therefore phenomenon – it is here to stay. Monitor jobs” make it increasingly difficult to predict lead to greater demand for convenience Deloitte identified 4 key drivers that will how much time consumers spend at home. products. likely help the convenience movement gain This fact, along with a shift in consumer further traction. spending, leads to more out-of-home Urbanization . The revenues of out-of-home The number of people living in German • Busy lifestyles and higher incomes players are expected to grow by 4 percent cities7 is expected to continue its growth • Decreasing sizes in 2019, driven by rising numbers of con- trend from 73.1 percent in 1990 to sumer visits and increasing prices even 78.9 percent in 2030.8 This means busier • Urbanization at-home consumption further declines.4 lifestyles for an increasing number of • Aging population We are also seeing an increase in to-go people who, in turn, demand more efficient snacking during the day. 58 percent of and timesaving ways of shopping and con- consumers at least occasionally buy to-go venient products. or meals to replace regular meals5. Aging population Decreasing household sizes The share of people aged 65 and over The number of single-person households will make up 27 percent of Germany’s in Germany rose from 16.0m in 2012 to population by 2030.9 This group requires 17.3m in 2018.6 Due to rising property close-to-home shopping opportunities or prices and limited space in urban areas, home delivery and reduced effort when new buildings often do not include space it comes to the preparation and for . Therefore, consumers of meals. Players such as Lieferando and are less likely to stock up on staples at a Uber Eats are already tapping into that retailer and more likely to shop impulsively opportunity and answering the demand for and for smaller portions. Consumers are convenience.

58 percent of customers at least occasionally purchase to-go snacks or meals in or discount stores.

4 Monitor Deloitte analysis. 5 Convenience YouGov study, 2018. 6 German Federal Office of Statistics, 2019. 7 Cities with more than 2000 inhabitants. 8 Statista, 2019. 06 9 German Federal Office of Statistics, 2019. Convenience – Anything, Anytime, Anywhere

The race to hyper-convenience assortments. In particular, end consumers Supermarket chains are introducing The demand for convenience solutions are demanding ultra-fresh products that in-store self-service and fresh sushi is affecting the products on the market they can consume immediately after bars, to name just a few of the ways - as well as the structure of their sales purchase with no further heating or ers are expanding their product portfolios. channels in terms of location, services and preparation. Not only are supermarkets store format. and discounters increasingly focusing on manufacturers need to ready-to-eat products, other players like rethink their assortments as novel com- New convenience product categories have added these products to petitors succeed in pushing them out of Not all convenience product categories their assortments as well. the market. Players like eat happy, Natsu (please see 2.2 for a detailed definition of as well as such smaller local chains as the convenience food categories) are growing For instance, one leading German restaurant Neni have successfully at the same pace. As more consumers chain already generates 50 percent of penetrated the segment. turn their focus to convenience, we see its revenues from hot and cold ready-to- two major developments on the product eat products such as salad, and landscape: . And as a reflection of the growing focus on convenience products, The emergence of the ready-to-eat some bakeries are even offering facilities category to prepare these convenience products Wraps, and other ready-to-eat in store that take up more space than the meals and snacks are conquering retailer customer-facing counter.

Fig. 3 – Top 3 most demanded products in the ready-to-eat category at retailers10

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10 Convenience YouGov study, 2018. 07 08 Convenience – Anything, Anytime, Anywhere

Fig. 4 – Key aspect of convenience products

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The increasing relevance of the Focus on modern trends & product itself, so the packaging must make ready-to-heat11 category international the freshness and quality of preparation Retailers are expanding their assortments Demand is high for innovative products transparent for consumers. of chilled and frozen ready meals and that offer the modern style and taste of snacks that require heating, but no further international cuisine or follow the latest Smaller serving sizes preparation before eating. Sales for fro- food trends. German consumers are Food manufacturers need to offer smaller zen ready-to-heat meals grew by increasingly enjoying world cuisine, as serving sizes to appeal to the increasing 2 percent from 2017 to 2018 while overall demonstrated by the 17 percent increase number of single and two-person house- products experienced only in Asian since 2013. Overall, holds. 0.2 percent growth.12 64 percent of Germans say they love to eat international dishes.14 Quick turnaround and ease Frozen food producer Steinhaus has of preparation recently introduced Gyoza frozen Asian Focus on health The key to responding to the consumer’s meals and a new chilled ready-to-heat Consumers are demanding products that convenience demands is to keep it short pasta range for microwaves, while com- are rich in nutrients and support a healthy and simple, e.g. quick preparation in a sin- petitor Hilcona is increasing its focus lifestyle, e.g., ingredients for detoxing or a gle pan, in the microwave or eaten right out on ready meals. In addition to portfolio cleanse. of the box – yet the food must also offer expansion among existing players, new high quality and superior taste. players such as YouCook have already Functional, sustainable and entered the growing ready-to-heat transparent packaging segment.13 or packaging needs to facilitate ease of consumption (e.g., cutlery inte- For both product categories mentioned grated into the packaging) and promote here, food manufacturers need to con- sustainability. Purchasing decisions are sider the following key features. also often based on the appearance of the

11 Ready-to-heat products are prepared snacks or meals that only require heating before consumption. 12 Best before date typically 2-3 . 13 German Institute for Frozen Food, 2019. 14 Deloitte analysis. 09 Adapting retail channels Fig. 5 – Development of retail convenience formats Retail channels will need to change Hyper convenience space significantly to meet consumer demands. Deloitte expects companies to adapt their igh models in two different ways:

Expanding convenience portfolio Retailers will expand the breadth and depth of their convenience product range with ready-to-heat or handy single ure convenience Supermarket serving to-go packages. Supermarkets players have already installed brand new open fridges right at the store entrance. Even discounters have enlarged their portfolio Gas stations & Online focused with , salads, and sandwiches. snack vendors players Drug stores Growing convenience formats At the same time, we can expect the level of convenience offered in terms of loca- Convenience ortoio Old fashioned tion, service and store format to increase home delivery across all channels. Established super- market players have recently opened Discounters/ new formats in urban hypermarkets areas (e.g., REWE to Go) to attract walk-in customers and respond to the trend of shopping at retail locations that are close ow Convenience o ormt igh to home. We have seen retail revenues shift increasingly towards locations within <1.5% 1.5–3% >3% Revenue growth 2017–2018 3 to 5 minutes driving distance of a con- sumer’s home.

A variety of retailers are competing for convenience-loving customers. Supermar- kets, discounters, drugstores, gas stations and bakeries have all adapted their busi- ness models to meet market demand. At the same time, new formats such as online food deliverers are entering the market and further fueling competition.

Market players with a stronger focus on convenience have experienced higher rev- enue growth compared to those focused less on convenience.

We can expect the key drivers of the con- venience trend to remain relevant and we recognize that the German market much less mature than China or the US. As a result, Monitor Deloitte expects all players on this market to keep pushing into the hyper-convenience space.

10 Convenience – Anything, Anytime, Anywhere

The convenience convergence ing more on convenience products, mainly of retail channels in the areas of and ready meals Only a few players have managed to that showcase its organic private label establish pure convenience formats on brand. Offering its own range of ready the German market. REWE to Go and meals, Rossmann is also counting on Yormas are two examples that come close increasing revenue streams with private to a hyper-convenience format. label products. That said, drugstores cater to a comparably small food consumer Traditional supermarkets will continue segment that is more focused on healthy to develop smaller city formats with living and . If they pose a areas ranging from 100 to 400 qm2 and threat, it is to the revenues of organic move into the ground floor of residential specialty markets. apartment blocks. Supermarkets will also adopt practices common among more Gas stations and snack vendors (such as mature players like China’s Hema. This bakeries) have been pioneers for conveni- means a stronger focus on convenience, ence food in Germany and will continue to e.g. integrating cooking of fresh produce evolve. The partnership between Rewe to purchased in-store, dining areas in-store, Go and gas station chain Aral offers fresh seamless checkout and product rec- salads, and a wide range of other ommendations via an app. To prevent to-go snacks, marking what is clearly only high customer churn in favor of more the beginning of a major change for gas online-focused players, supermarkets will stations. need to further invest in such convenience services as online ordering, instant home The vending segment, which delivery and click & collect. accounts for 3.1bn euros in sales is forecasted to grow by 30 percent from Due to their ex-urban locations, larger 2018 to 2030. However, sweet and salty footprint and lower price point, discount- snacks only account for 14 percent of ers and hypermarkets are not positioned vending machine sales, representing a to become convenience-only players. niche market in Germany where the focus However, we know that discounters will for vending machine providers remains on be unable to grow further if they compete hot and cold (86%). purely on price, as demonstrated by their growth rates underperforming the super- Supermarkets and pure convenience markets. Discounters will therefore also players are therefore in the best position make an effort to compete on convenience to win on the convenience market. They by emulating pure play formats. Penny has already have the convenient point-of-sale introduced an in-store to-go area, Lidl has locations they need as well as the ability to recently started testing two mini-stores in adapt their assortments and change store Munich and Aldi is rolling out a new small formats faster than competition. store concept in London called Aldi Local.

Drugstores will also continue to increase their convenience food portfolio in order to compensate for decreasing sales in traditional segments such as cosmetic, and household products. Within the last three years, the share of food sales in drugstores rose to 24.3 percent of total sales.15 Drugstore chain dm is focus-

15 GfK, 2019. 11 The chef’s perspective: HoReCas increasingly rely on convenience products

Convenience has never had a positive con- Fig. 6 – HoReCa perspective: Drivers of convenience notation in professional , as it has always been associated with low quality, bad taste and poor nutrition. While many chefs still share this view, convenience products have become significantly more relevant in recent years due to several ow viiity o ee or cot factors. Experts report that 90 percent of ie wororce rection professional kitchens are already regularly using convenience products.16

Shortage of skilled workers17 Restaurants are facing a dilemma today as the labor market cannot meet the demand ncreing emn or for skilled cooking staff. The number of convenience roct kitchen apprentices declined from 11,000 in 2012 to 9,000 in 2016, while only 50 percent of trainees receive a passing grade in their exams.

Demand for flexibility and always available, diverse meals Consumers expect restaurants to offer a large variety of products regardless of the season or country of origin. Kitchens are Demand for flexibility also under pressure to serve meals quickly n wy vie, and around the clock, while an increase ivere me in special dietary needs adds further complexity. Without using convenience products, HoReCa players will not be able to address these demands and remain profitable. Experts report that 90 percent of all professional kitchens use convenience products regularly.

16 Monitor Deloitte survey. 12 17 German Federal Employment Agency, 2019. Convenience – Anything, Anytime, Anywhere

Cost pressure Room for refinement and high product is homemade. As there is no legal Today, HoReCa players have to deal with marginal savings are key protection for terms such as “homemade”, various cost drivers: We expect demand to be high for prod- restaurants often use them to give cus- ucts that reduce preparation time and tomers the illusion that meals are cooked • Increasing labor costs for kitchen staff cost less to buy than to make, particularly from scratch. to prepare food (e.g., cutting, breading, if consumers still perceive them as home- marinating) made. That said, ready meals or ready-to-eat • Utility costs for water, electricity, etc. and products are more expensive to purchase, for running a kitchen around the clock Chefs need to consider what makes the and the marginal time saving is less most in terms of timesaving and than with ready-to-cook and pre-cooked • The high cost of keeping a large variety efficiency improvements when incorporat- products. Not only does this not offset the of products in stock and the difficulty of ing convenience products into a profes- higher costs, end consumers often see the accurately forecasting demand for fresh sional kitchen. ready meals as inauthentic. and perishable food

• Reduction of product waste Even though ready-to-eat and ready meals save the most time in theory, demand is So, although convenience products may highest for ready-to-cook and pre-cooked have a higher price tag, advantages such products, as they allow for the freedom to as lower labor costs, waste reduction and add their own refinements. Professional more precise management of product chefs can still create the impression that a supply/storage make them a realistic alternative.

Fig. 7 – Characteristics of Convenience Products in the HoReCa Sector

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repared to be processed in kitchen, but not yet cooked, itchen rey seasoned or further refined (e.g. raw chicken breasts, raw cleaned ).

Has to be cooked, but does not eytocoo need additional preparation steps (e.g. frozen fish fillets, breaded products, veggie burger patties).

repared and cooked products that only need to be heated and paired recooe with additional ingredients to form a meal (e.g. potatoes , spring rolls).

Full meal that is fully cooked and ey me needs to be heated for consumpti- on (e.g. veggie meals).

Can be consumed straight from the eytoet packaging without further preparati- on or heating (e.g. pre-made salads or sandwiches).

13 How food manufacturers need to adapt to win the convenience game

Fig. 8 – Challenges for food manufacturers

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As products and distribution formats Customer-centric sales and pricing change due to the convenience demands To become a producer of choice food, of consumers and HoReCa players, food manufacturers need to tailor their sales manufacturers face a wide range of chal- approach to each customer. This means lenges. building up the right skills and gaining insight into each sales channel’s players, The big question for manufacturers is key purchasing requirements and compe- what do they need to change in order to tition of. meet these demands, and how do they need to adapt their operations in order Manufacturers face a highly diversified to stay relevant in this highly competitive customer landscape when it comes to market? convenience products, from various retail formats and wholesalers to restaurants and caterers. The sales team therefore needs to consider the differences across channels and customers when it comes to

14 Convenience – Anything, Anytime, Anywhere

purchasing experience, negotiation power, Hyper-regional and last-mile Ready-to-eat convenience food manu- how to pitch a product’s benefits, market- logistic networks facturer Natsu has its own fleet of 130 ing materials and pricing or promotional To successfully deliver convenience food, refrigerated trucks to deliver products to activities. manufacturers need to rebuild their cur- over 2,500 supermarkets every other day. rent logistics infrastructure. In addition to delivery, Natsu provides They will need multiple key account teams services from shelf management and shelf that are structured by channel rather than An increasing number of urban locations, stocking to accepting return of discarded product category. the short of products and the products. resulting high delivery frequency as well as The large number of different sales a highly fragmented and diverse customer channels and customers will also require landscape will force producers to adapt. different pricing strategies and frame- works along with the skills to execute the Manufacturers need to assess their strategy. Manufacturers need to have existing and target customer landscape, omnichannel pricing, processes and sup- mapping their current logistics capabilities portive analytics in place to sell products against the requirements for each sales at a consistent yet profitable price across channel, customer and product. all different sales channels. Requirements may differ significantly For example, instead of relying on typical depending on the go-to-market approach. retail promotions, today’s food companies If a manufacturer decides to focus will need to come up with different price on serving HoReCa customers as a schemes to market directly to HoReCa wholesaler, a more centralized logistics players, where the approach needs to be approach would be sufficient to supply more net price-oriented. central hubs or warehouses. By contrast, many producers want to skip the interme- Price cut promotions play a significant diary (wholesaler) to achieve higher mar- role in retail, especially when it comes to gins and sell directly to HoReCa players. convenience products, given the limited If the goal is to sell directly to the HoReCa shelf space, lack of secondary placement market, they will need hyper-regional and possibilities and therefore little chance to last-mile networks. Companies can rely on quickly push new trend-based conveni- either internal logistics or external part- ence products to consumers. ners to manage their distribution efforts. It may be a challenge, however, to find a suitable logistics partner that meets all their demands in terms of market cover- age or refrigerated trucks.

Ready-to-eat products also require more complex logistic solutions, as most players deliver directly to the stores almost daily. That is why most regionally-focused play- ers succeed.

15 Trend scouting, co-creation and Sustainable yet very convenient Start with the right questions rapid product development packaging As a starting point, food manufacturers A large challenge for manufacturers is to As brand loyalty decreases, packaging is should use the following questions as anticipate consumer trends and create one of the main ways that convenience a quick health check to see if they are relevant products in a timely manner. products differentiate themselves. Packag- positioned to win in the convenience food Manufacturers often lack direct contact ing has become a decisive factor in the market. with the end consumers, because retailers decision to list products, buy them and • Are you able to anticipate end consumer or wholesalers act as intermediaries. accept a higher price premium. trends and bring new products to market quickly? Manufacturers therefore need to invest Firstly, packaging must increase the prod- time and effort into fully understanding uct’s visibility in-store (especially in retail) • Do you have the right sales organization consumer needs even before a trend to enable producers to stand out in the and pricing strategies to optimally serve emerges. For HoReCa customers, this limited shelf space. Secondly, packaging your customers across multiple and means close collaboration or even must facilitate the consumption and utili- diverse sales channels? co-development with chefs working in zation of the product. Thirdly, packaging • Do your logistics capabilities reflect the restaurants, system gastronomy or hotels allows producers to provide the same customers’ needs in terms of locations to help them better understand customer product to end consumers and HoReCa, and high delivery frequency? demands. albeit with different sizes and handling. Finally, packaging needs to be more • Does your packaging consider the key If they do not have direct access to cus- sustainable, as anti-plastic waste and success factors of visibility, functionality tomers, having a close relationship with pro-sustainability sentiment is dominant and sustainability? their wholesale customers could provide not only in consumers’ minds but also in highly valuable insight into the consumer. the political discourse. To gain a competitive advantage, food The key here is a close exchange between manufacturers will have to come up with the producer’s key account management, As almost all retailers and wholesalers answers to these questions. Only those product development and the wholesal- have publicly committed to using sustain- who are able institute the right changes er’s purchasing departments. Without an able materials, producers must deliver in their organization will ultimately benefit intense exchange, manufacturers will not ideas that go even further. They should from the increasing demand for conveni- be able to find and test the right recipes, collaborate with distributors on more sus- ence food solutions. portion sizes, preparation styles and tainable packaging such as single-material packaging. solutions and alternative materials such as bamboo. R&D cycles need to be fast and highly efficient to convert trends into successful products. Especially in the convenience industry, trends are fast-paced and time- to-market is the key to gaining market share and exploiting food trends. Compa- nies should derive in-demand products based on these trends, whether it pertains to the type of cuisine, preparation style, healthy additives or portion size. Particu- larly when marketing to the HoReCa seg- ment, it is crucial to launch pilot products quickly with key customers and establish rapid feedback loops that allow room for adjustments before the final product launch.

16 Convenience – Anything, Anytime, Anywhere

17 Contacts

Thorsten Zierlein Egbert Wege Lead Partner Lead Partner Retail & Consumer Products Retail, Wholesale & Distribution Tel: +49 (0)89 29036 7202 Tel: +49 (0)40 32080 4596 [email protected] [email protected]

Carina Garbe Paulina Stuhlmacher Manager Consultant Retail & Consumer Products Retail & Consumer Products Tel: +49 (0)69 97137 241 Tel: +49 (0)89 29036 7380 [email protected] [email protected]

18 Convenience – Anything, Anytime, Anywhere

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Issue 07/2020

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